Q4 2023 Truist Financial Corp Earnings Call

Participants

Bradley Jason Milsaps; Head of IR; Truist Financial Corporation

Clarke R. Starnes; Senior EVP, Chief Risk Officer & Vice Chair; Truist Financial Corporation

Michael Baron Maguire; Senior EVP & CFO; Truist Financial Corporation

William Henry Rogers; Executive Chairman, CEO & President; Truist Financial Corporation

Ebrahim Huseini Poonawala; MD of United States Equity Research & Head of North American Banks Research; BofA Securities, Research Division

Elyse Beth Greenspan; Director & Senior Analyst; Wells Fargo Securities, LLC, Research Division

Erika Najarian; Analyst; UBS Investment Bank, Research Division

Gerard Sean Cassidy; MD, Head of U.S. Bank Equity Strategy & Large Cap Bank Analyst; RBC Capital Markets, Research Division

John Eamon McDonald; Senior Analyst of US Large-Cap Banks; Autonomous Research US LP

Kenneth Michael Usdin; MD and Senior Equity Research Analyst; Jefferies LLC, Research Division

Manan Gosalia; Equity Analyst; Morgan Stanley, Research Division

Matthew Derek O'Connor; Research Analyst; Deutsche Bank AG, Research Division

Michael Lawrence Mayo; MD, Head of U.S. Large-Cap Bank Research & Senior bank Analyst; Wells Fargo Securities, LLC, Research Division

Robert Scott Siefers; MD & Senior Research Analyst; Piper Sandler & Co., Research Division

Presentation

Operator

Greetings, ladies and gentlemen, and welcome to the Truist Financial Corporation Fourth Quarter 2023 Earnings Conference Call. (Operator Instructions) A brief question-and-answer session will follow the formal presentation. As a reminder, this event is being recorded.
It is now my pleasure to introduce your host, Mr. Brad Milsaps.

Bradley Jason Milsaps

Thank you, Rocco, and good morning, everyone. Welcome to Truist's Fourth Quarter 2023 Earnings Call. With us today are our Chairman and CEO, Bill Rogers; and our CFO, Mike Maguire. During this morning's call, they will discuss Truist's fourth quarter results, share their perspectives on current business conditions and provide an updated outlook for 2024.
Clarke Starnes, our Vice Chair and Chief Risk Officer; Beau Cummins, our Vice Chair and Chief Operating Officer; Dontá Wilson, Chief Consumer and Small Business Banking Officer; and John Howard, Truist Insurance Holdings' Chairman and CEO, are also in attendance and available to participate in the Q&A portion of our call.
The accompanying presentation as well as our earnings release and supplemental financial information are available on the Truist investor relations website, ir.truist.com. Our presentation today will include forward-looking statements and certain non-GAAP financial measures. Please review these disclosures on Slides 2 and 3 of the presentation regarding these statements and measures as well as the appendix for appropriate reconciliations to GAAP.
With that, I'll turn it over to Bill.

William Henry Rogers

Thanks, Brad, and good morning, everybody, and thank you for joining our call today. Before we discuss our fourth quarter results, let's begin with our purpose on Slide 4. As you know, Truist is a purpose-driven company committed to inspiring and building better lives and communities. I'd like to take just a few moments to highlight some of the ways we demonstrated our purpose during 2023.
Through Truist Community Capital, we committed nearly $2.1 billion to support more than 15,000 units of affordable housing. This helped create more than 15,000 jobs and served more than 130,000 people in low and moderate-income communities this year. Also, our teammates impacted 5,300 organizations and causes through their charitable giving and more than 62,000 hours of volunteer service.
In addition, we started a small business community heroes initiative, which empowers our branch teammates alongside our virtual small business specialists, leveraging our digital solutions to proactively connect via caring conversations with small business owners who tirelessly work to serve our neighbors, create jobs, build our communities and help drive our economy. So those are just a few examples of the meaningful work we're doing as a company to have a positive impact on the lives of our clients, our teammates, our communities, and our shareholders as we work to realize our purpose.
All right. So let's turn to some of the key takeaways on Slide 6. Truist reported solid fourth quarter results -- adjusted earnings after excluding several discrete items that impacted our results. The largest of these items, of course, is a $6.1 billion goodwill impairment charge. Mike is going to provide more details later in our call, but this was the result of our annual impairment test, which we conduct each year as of October 1. So importantly, this charge is noncash. It has no impact on our liquidity, regulatory capital ratios, the payment of our common dividend or our ability to do business and serve our clients.
On an adjusted basis, we reported net income of $1.1 billion or $0.81 a share, which excludes the impact of the impairment charge, the industry-wide FDIC special assessment and a discrete tax benefit. In addition, pretax merger-related and restructuring charges of $183 million negatively impacted adjusted EPS by $0.10 per share. Most of these charges were related to our cost saving plan.
Despite these discrete items in the quarter, we're pleased with our underlying results. As you can see on the slide, our solid performance was defined by several key themes. First, we made strong progress on our organization simplification plan during this quarter. Since these initiatives were announced in mid-September, we've reduced headcount, realigned significant elements of our organizational structure to improve efficiency and to drive revenue opportunities in 2024 and beyond.
As a result of these efforts and others through 2023, the fourth quarter marked the second consecutive quarter we've seen our expenses decline. Although the first quarter will experience typical seasonal expense headwinds, we're on track and fully committed to delivering on the cost initiatives that we outlined in September, which will limit adjusted expense growth to flat to up to 1% in 2024 while also continuing to invest in initiatives for our core clients, technology and risk management. Although asset quality is normalizing off historically low levels, we're encouraged that nonperforming loans declined during the quarter while we continue to build our loan loss reserve considering the uncertain economic environment.
Consistent with our capital planning strategy, our CET1 ratio increased 20 basis points sequentially to 10.1. Although we're committed to building capital, our balance sheet also remains open to core clients as our primary capital priorities are supporting the financial needs of new and existing clients and the payment of our common dividend.
So before I hand the call over to Mike to discuss our financial performance in more detail, let me provide a quick update on our progress we're making on improving the experience for our clients. We'll do that on Slide 7. Truist continues to see improved digital engagement trends with strong transaction growth over the last year. Mobile app users grew 9% versus the fourth quarter of 2022, which is contributing to increased transaction volumes, which now account for 62% of total bank transactions.
As shown on the chart on the left, growth in digital transactions is primarily reflected by increased Zelle usage as clients continue to value efficient payment and money movement capabilities. And while this is certainly positive, Truist still has a meaningful opportunity to shift the transaction mix even more towards digital, specifically by leveraging our T3 strategy, which is the concept that touch and technology work together to create trust that further enhances the client experience and drives greater digital adoption and efficiency. Our goal is to create seamless experiences for our clients by offering more self-service capabilities to enhance the overall client experience.
Truist Assist is a perfect example of this concept. Since launching in 2022, we've seen increased client adoption, with 1/3 of the total interactions represented in the fourth quarter of 2023 alone. Additionally, 85% of the conversations were completed using the automated assistant this quarter. As we look into 2024, we expect accelerated adoption of Truist Assist, which should lead to additional operational efficiencies for Truist.
So overall, I'm pleased with the digital progress we've made in 2023 and excited about the opportunity to further leverage Q3 and 2024 and beyond that. So let me turn it over to Mike to discuss our financial results in a little more detail. Mike?

Michael Baron Maguire

Great. Thank you, Bill, and good morning, everyone. For the quarter, we reported a GAAP net loss of $5.2 billion or $3.85 per share. As Bill noted, reported earnings per share were impacted by several items detailed at the top of Slide 8. Those include a noncash goodwill impairment charge of $6.1 billion, a special FDIC assessment of $507 million and a discrete tax benefit of $204 million.
Excluding these 3 items, adjusted net income was $1.1 billion or $0.81 per share. In addition, merger-related and restructuring charges, primarily related to severance and branch consolidation associated with our cost saves initiatives, negatively impacted EPS by another $0.10.
Before providing further details on this quarter's underlying financial performance, I do want to provide some additional background on the goodwill impairment charge that occurred during the quarter. We test our goodwill for impairment annually on October 1. This year's test resulted in an impairment of $6.1 billion.
The impairment was primarily driven by the continued impact of higher interest rates and higher discount rates and a sustained decline in banking industry share prices, including Truist share price. Importantly, as Bill noted in his opening remarks, this is a noncash charge and has no impact on our liquidity, no impact on our regulatory capital ratios, our ability to pay our common stock dividend or to serve the needs of our clients.
Moving on to the results for the quarter. Total revenue increased 50 basis points sequentially due to a more modest decline in net interest income than expected. Adjusted expenses declined 4.5% or 5.2%, if excluding the impact of TIH independence readiness costs. Our net interest margin improved 3 basis points to 2.98% during the quarter.
We added 20 basis points of CET1 capital in the quarter and increased our ALLL ratio by 5 basis points in light of ongoing economic uncertainty. Finally, our tangible book value per share increased 13% on a linked quarter basis due primarily to the impact of lower interest rates on the value of our available-for-sale investment portfolio.
Next, we'll turn to Page 9 to cover loans and leases. Average loans decreased 1.7% sequentially, reflecting our ongoing balance sheet optimization efforts and overall weaker client demand. Average commercial loans decreased 1.8%, primarily due to a 2.3% decrease in C&I balances primarily due to lower client demand.
In our consumer portfolio, average loans decreased 1.8% primarily due to further reductions in indirect auto and mortgage. Overall, we expect average commercial and consumer balances decline modestly in the first quarter driven by our ongoing mix shift toward deeper client relationships, deemphasizing lower return portfolios and the effects of continued economic uncertainty.
Moving now to deposit trends on Slide 10. Average deposits decreased 1.4% sequentially as growth in time deposits and interest checking was more than offset by declines in noninterest-bearing and money market balances. Noninterest-bearing deposits decreased 3.7% and represented 29% of total deposits compared to 30% in the third quarter and 34% in the fourth quarter of 2022.
During the quarter, consumers continued to seek higher rate alternatives, which drove an increase in deposit costs, albeit at a slower pace relative to recent periods. Typically, total deposit costs increased 9 basis points sequentially to 1.90%, down from a 30 basis point increase in the prior quarter, which resulted in just a 100 basis point increase to our cumulative total deposit beta to 36%.
Similarly, interest-bearing deposit costs increased 10 basis points sequentially to 2.67%, down from a 38 basis point increase in the prior quarter, which also resulted in a 100 basis point increase to our cumulative total interest-bearing deposit beta to 50%. Going forward, we will continue to maintain a balanced approach, focusing on core relationships, staying attentive to client needs and striving to maximize the value we can add to relationships outside of rate pay.
Moving to net interest income and net interest margin on Slide 11. For the quarter, taxable equivalent net interest income decreased by 0.6% linked-quarter due to lower average earning assets and higher rate paid on deposits partially offset by favorable hedge income. Reported net interest margin improved 3 basis points on a linked basis quarter. While net interest margin expanded in each of the last 2 quarters, we expect it to contract in the first quarter due to an increase in rate paid on deposits, partially offset by continued improvement in spreads on new and renewed loans.
Turning to noninterest income on Slide 12. Fee income increased $47 million or 2.2% relative to the third quarter. The linked-quarter increase was primarily attributable to higher service charges on deposits, which were up $76 million in the fourth quarter, due primarily to the third quarter being impacted by $87 million of client refunds.
Lending-related fees increased $51 million linked-quarter due to higher leasing related gains, and other fees declined $66 million due to lower equity income. Fee income was down 3.2% on a like-quarter basis as lower investment banking and trading, deposit service charges, mortgage banking and other income were partially offset with higher insurance income and higher lending-related fees.
Next, I'll cover noninterest expense on Slide 13. GAAP expenses of $10.3 billion increased $6.5 billion linked-quarter due primarily to the previously mentioned $6.1 billion goodwill impairment charge, the $507 million FDIC special assessment and a $108 million increase in merger-related and restructuring expense, partially offset by a $183 million decline in personnel costs. Excluding these items and the impact of intangible amortization, adjusted noninterest expense declined 4.5% sequentially or 5.2% excluding the impact of $33 million of TIH independence readiness costs.
The decrease in adjusted expense was driven by lower personnel expense due to the execution of our cost savings program, resulting in headcount reductions as well as lower incentive compensation to reflect our performance in 2023. These improvements were partially offset with higher professional and outside processing expenses. Adjusted noninterest expenses were essentially flat on a like-quarter basis.
As Bill mentioned, we are pleased with the progress that we've made on the cost savings initiative that we announced in September. Our original goal was to eliminate or avoid expenses of approximately $750 million over a 12- to 18-month period, which would help us manage our expense growth in 2024 to flat to up 1%. The largest category of savings targeted in our plan was a reduction in force, driven by a company-wide assessment of spans and layers of management, the elimination of redundant functions and the restructuring of certain business lines. We've made significant progress here. FTEs are down 4% from June 30 to December 31, with the final set of reductions underway in the first quarter.
The second category we highlighted included cost savings opportunities that will be driven by organizational simplification. Examples include reimagining our go-to-market strategy in CRE, simplifying our benefits programs and rightsizing our branch network and related staffing. As part of these efforts, we anticipate reducing the size of our branch footprint by nearly 4% during the first half of 2024.
In addition to lowering headcount and simplifying our organization, we also reexamined our technology investment spend. Through this process, we have rationalized, rescoped or delayed the start of a number of projects primarily in noncore areas. We estimated restructuring costs related to this initiative to be approximately $225 million or 30% of our initial $750 million goal. So far, we have incurred around $200 million of charges related to the program, mostly driven by reductions in force in the facilities-related decisions. We would expect to recognize the bulk of the remaining costs in the first quarter.
It's clear to state here that the work is never done, and we continue to assertively manage costs. But we feel confident that we will achieve our flat to up 1% expense target for 2024.
Okay. Moving on to asset quality on Slide 14. Asset quality metrics continued to normalize in the fourth quarter but overall, remain manageable. Nonperforming loans declined 6% linked-quarter, while early-stage delinquencies increased 11 basis points sequentially due to an increase in 30- to 89-day past due consumer and C&I loans. Included in our appendix is an updated data on our office portfolio, which represents 1.7% of total loans. We are pleased that nonperforming and criticized and classified office loans decreased modestly linked-quarter, while we increased the reserve on this portfolio from 8.3% at September 30 to 8.5% at year-end.
During the quarter, our net charge-off ratio increased 6 basis points to 57 basis points. The increase in net charge-offs for the quarter reflects increases in our other consumer, indirect auto and C&I lending portfolios, partially offset by lower CRE losses. We continue to build reserves as provision expense exceeded net charge-offs by $119 million.
Our ALLL ratio increased to 1.54%, up 5 basis points sequentially and 20 basis points year-over-year, due to ongoing credit normalization and greater economic uncertainty. Consistent with our commentary last quarter, we've tightened our risk appetite in select areas, though we remain -- maintain our through-the-cycle supportive approach for high-quality, long-term clients.
Turning now to capital on Slide 15. Truist added 20 basis points of CET1 capital in the fourth quarter through a combination of organic capital generation, disciplined RWA management and this quarter's tax benefit, partially offset by the FDIC special assessment. With a CET1 ratio of 10.1%, Truist remains well capitalized relative to our minimum regulatory requirement of 7.4% that became effective on October 1.
We remain committed to building capital and do not have plans to repurchase shares over the near term. We continue to be disciplined with our RWA management strategy as we allocate less capital to certain businesses, though we have been clear that our balance sheet remains open to core clients. Our primary capital priorities are supporting the financial needs of new and existing core clients as well as the payment of our $0.52 per share quarterly dividend.
In addition, we continue to believe that Truist's capital flexibility with Truist Insurance Holdings is a distinctive advantage. We estimate that our residual 80% ownership stake provides greater than 200 basis points of additional capital flexibility, and we continue to evaluate our strategic options with respect to TIH.
The table in the center of the slide provides an updated analysis of our AOCI at year-end. During the fourth quarter, the component of AOCI attributable to securities declined from $13.5 billion to $11.1 billion or by $2.4 billion due to the decline in long-term interest rates during the quarter and finished 2023 essentially flat when compared to year-end 2022. AOCI related to our pension plan improved from $1.5 billion to $1.1 billion, which is a level that will remain static throughout 2024. Based on estimated cash flows in today's forward curve, we would expect the component of AOCI attributable to securities to decline from $11.1 billion at the end of the fourth quarter to $8 billion by the end of 2026 or by approximately 28%.
We continue to feel confident in our ability to meet the requirements and build capital under the proposed phase-in periods based on our assessment of the proposed capital rules. We have refined our estimate for the impact to risk-weighted assets under Basel III and now expect a mid-single-digit increase in risk-weighted assets compared to our previous estimate of a high single-digit increase.
Finally, as it relates to the proposed rules for a long-term debt requirement, we estimate that Truist's binding constraint is at the bank level and that the shortfall is approximately $12 billion. We remain confident that we will be able to meet the proposed requirement at both the bank and the holding company level through normal debt issuance during the phase-in period. As part of our regular way funding plan, we issued $1.75 billion of long-term debt during the fourth quarter of 2023.
All right. I'll now turn to Page 16 to review our updated guidance. Looking into the first quarter of 2024, we expect revenues to remain flat or decline by 1% from 4Q 2023 GAAP revenue of $5.8 billion. Net interest income is likely to be down 3% to 4% in the first quarter, which is more than we experienced in the fourth quarter due primarily to 1 less day, a smaller balance sheet and some pressure on our net interest margin driven by rate paid. We expect linked-quarter improvement in noninterest income due to higher insurance and investment banking and trading income, partially offset by lower other and lending-related fee income.
Adjusted expenses of $3.4 billion are expected to increase by 4% due to normal seasonal increases related to payroll taxes and higher incentive accruals. For the full year 2024, we expect revenues to decrease by 1% to 3%. Our balance sheet and interest rate sensitivity continues to be positioned as relatively neutral, which is in line with our long-term goal.
Our forecast assumes that net interest income troughs in the first half of 2024 and then remains relatively stable, assuming 5 reductions in the Fed funds rate, with the first reduction coming in May 2024. In addition, we assume that insurance continues to grow at high single-digit rate, while investment banking and trading should benefit from a recovery in capital markets.
Although we anticipate adjusted expenses rising 4% in the first quarter due to seasonal factors, full year 2024 adjusted expenses are still expected to remain flat or to increase 1% over 2023 adjusted expenses of $14 billion, which includes TIH independence readiness costs. Our 2024 expense guidance of flat to up 1% also includes $85 million of TIH independence readiness costs.
In terms of asset quality, we expect net charge-offs of about 65 basis points, reflecting a continued normalization of loss rates across our consumer and wholesale loan portfolios, a lower denominator from declining loan balances and our strategy to be proactive in resolving higher risk portfolios. Finally, we expect our effective tax rate to approximate 17% or 20% on a taxable equivalent basis.
I'll now turn it back to Bill for some final remarks.

William Henry Rogers

Thanks, Mike. So looking back at 2023, I'm really proud of the work our teammates accomplished, which helped accelerate our transformation into a simpler, more profitable company. As I discussed in September, our transformation is centered on improving efficiency and realigning certain aspects of our leadership and operating model within our 3 current operating segments: wholesale, consumer and insurance, to increase our efficiency and drive revenue opportunities.
In the third quarter, we've realigned and consolidated several lines of business within consumer and wholesale, including creating a single enterprise-wide payments group, consolidating 3 commercial real estate units into 1 and consolidating 4 consumer lending platforms to leverage technology and capital resources. During the fourth quarter, we announced significant leadership appointments within consumer and wholesale and we formed a new operating council composed of key business leaders from across the organization. These leaders will help improve accountability, efficiency and ultimately drive better growth across our platform, while controlling risk, all of which are primary benefits of the simplification plan.
These strategic organizational changes designed to improve long-term revenue growth are complete, and we're beginning to see the impacts from our cost savings initiative. To that end, and as Mike discussed, our cost-saving efforts are going well and reflect the planning and execution that was ongoing throughout 2023.
These cost-saving efforts are funding important investments in our risk management infrastructure and core businesses while also helping to offset natural expense growth in other parts of our organization. We accomplished all of this while growing net new deposit accounts, strengthened our balance sheet through organic capital growth and strategically allocating our capital to core businesses.
Looking beyond the fourth quarter, our top priorities for 2024 include growing and deepening relationships with our core clients, leveraging our more efficient platform to gain market share, achieving our expense target and enhancing Truist's digital experience with T3, all while building capital and maintaining strong risk controls and asset quality metrics. We believe there is a significant potential to help our clients achieve their financial success by delivering our commercial consumer payments, investment banking, wealth and insurance capabilities throughout our existing footprint.
In investment banking, we've increased our market share across virtually all of our capital markets products. We've seen a significant increase in the number of lead roles across several products including investment-grade, equity capital markets, leveraged finance and asset securitization. In addition, our mind share with clients in our key industry verticals has never been stronger as we continue to expand into new verticals that are primed for growth as capital market activity recovers.
Across our wholesale businesses, recent changes in client coverage strategies should allow us to focus more intently on opportunities in the middle market, where we can bring unique perspective given the breadth and depth of our platform, especially in areas like investment banking and payments. We're seeing solid year-over-year growth in CIB referral revenue from commercial banking as we continue to deliver value-added advice and capabilities to our clients.
Truist Wealth which, beginning in 2024, will be part of our wholesale business segment, has seen positive asset flows in 10 of the last 11 quarters. By bringing the wealth business over to wholesale, we'll go to market as one team to deliver business transition advisory solutions to commercial and corporate clients.
In consumer, I'm encouraged that customer satisfaction scores have returned to premerger levels. In addition, net new checking account production was positive in 2023 as we added 59,000 new consumer and 53,000 new business accounts. And during the fourth quarter, we acquired more than 114,000 accounts through our digital channel, including 33,000 new to Truist.
While the branch network presents opportunity for further efficiency in certain markets, we're seeing improvements in productivity due to excellent teammate execution and investments in technology as evidenced by the increase in net new deposit accounts. We're encouraged by this increased productivity, and we'll look to make investments in branches in select key growth markets in 2025 and beyond.
So in conclusion, the fourth quarter was solid, but we acknowledge there's more work to do as we strive to produce better and more consistent results in the future. We view our fourth quarter performance as another step forward in that direction.
We're making strong progress on areas in our control, including managing our expenses, building capital and realigning our business so that it is well positioned to serve new and existing clients as markets recover. We're firmly committed to achieving our expense target in 2024, while we will continue to build and allocate capital towards core clients in our home markets we view as a distinctive competitive advantage. This heightened focus will lead to increased franchise and shareholder value over time.
Let me close by just thanking our teammates for their incredible purposeful leadership in 2023. Teammates, your focus and commitment fuels our confidence in 2024 and beyond. Thank you. So with that, Brad, let me turn it back over to you for Q&A.

Bradley Jason Milsaps

Rocco, at this time, will you please explain how our listeners can participate in the Q&A session. (Operator Instructions)

Question and Answer Session

Operator

(Operator Instructions) And today's first question comes from John McDonald with Autonomous Research.

John Eamon McDonald

Mike, I was wondering if you could unpack the outlook for the net interest income in 2024 a little bit, including the assumptions around deposits and whether taking out some Fed cut assumptions would change the outlook much, how sensitive there.

Michael Baron Maguire

Yes, John, no problem. So I guess if you think about '24 NII, I mentioned in the prepared remarks that we've got 5 cuts in our base plan, the first in May and then really another [25] at each meeting with the exception of November. On balances, we mentioned, I think, loans probably a touch of pressure in the first quarter, maybe down less than 1% and then relatively stable. On the C&I side, we see a nice -- a more stable outlook for the year on the consumer side, a bit of pressure. Deposits sort of picking up where we left off in the fourth quarter, so down, call it, 1.5% or so in the first and then declining, but I think albeit it may be a declining rate over the year.
So that's, I think, the primary piece, John. We think about repricing, and I think you've heard from peers as well on this. I mean probably a bit of caution warranted around the betas. So we think that some of the higher -- the faster stuff that moved on the way up probably moves fast on the way down, but there's still going to be a considerable amount of reprice lag. And so I guess those are the sort of fundamentals.
And then I guess you asked about cuts and whether there were fewer. I think we mentioned we're relatively neutral versus our base case on the 5 cuts. So whether there are 3 or 4 or maybe 6 or 7 cuts, I think we have less sensitivity there. That being said, I think a scenario where there are no cuts, that would be -- or significantly delayed cuts, that would be a headwind for us.

John Eamon McDonald

Okay. And then just a quick one on expenses. The guide for adjusted expenses in the 14 area. What expenses should we keep in mind for our modeling that are outside that adjusted -- so do you have some amortization that's usually, I guess, around $500 million and then some merger restructuring expected this year?

Michael Baron Maguire

Yes. You're right on the amortization, that would be excluded. On the [MRRCs], we mentioned we've got $25 million left on our cost savings initiatives based on estimates in the first quarter. They'll be down versus last year, should not be as much noise in '24 as we saw in '23.

John Eamon McDonald

Okay. And I guess just other MRRCs or incremental operating costs, like any of that throughout the year that we should keep in mind or a placeholder for some of that to occur beyond the first quarter?

Michael Baron Maguire

Yes, maybe just to touch, John, but I don't expect that to be a significant factor in our '24.

Operator

Our next question today comes from Scott Siefers with Piper Sandler.

Robert Scott Siefers

Mike, I was hoping you could talk a little bit about sort of how you might see loan demand trajecting through years. Certainly, I understand -- and I appreciate the comments about a little more pressure on loan balances in the early part of the year and then more stability. But just curious how you're thinking about whether demand can come back if we begin to get some rate cuts, more macroeconomic clarity, et cetera.

Michael Baron Maguire

Yes. No, Scott, I think you're right. I mean I think in our base case, we're assuming a couple of things. The 5 cuts, we think, will benefit demand a touch. But to the extent that, that's underestimated that would be welcome news. I think we mentioned from a C&I perspective, we do expect modest growth in that portfolio, at least in sort of the second quarter, third quarter and beyond. I think most of the pressure that we're seeing for the year is still on the consumer side. Others may weigh in on other factors. Bill?

William Henry Rogers

Yes. So a part of the pressure on the consumer side is we're creating as we're really reducing some of our focus on indirect as an example. And that's somewhat offset by the growth in Sheffield and Service Finance, but that doesn't -- sort of isn't a perfect balance in there. So the consumer reflects probably a little more of our own action and capital allocation than where we are from a market perspective.
And then I think as Mike said, I mean, on the C&I side, yes, we're open for business, so we're going to serve our markets. And I think we've got really, really strong markets. And when I think recovery comes, it will come disproportionately faster in our markets. And if that happens sooner, we'll see the benefit of that and we'll be recipient of that because we are, I think, gaining share in most of those capabilities.
And then the other part I'd just mention is that like -- and when we're winning, we're winning more disproportionately. So on the C&I side particularly, just 15% to 20% more of the deals are in left leads as an example. So if we look at sort of our portfolio last year, we're winning more on the left side. So that's got more profitability and more tailwind in terms of an ability to expand those relationships.
So I don't know if we're being conservative, to use that word, but I think we've got to sort of see what's in front of us. And hopefully, by the end of the year, if the rates turn out as we all forecast, we'll see a little spur in the economy and I think we'll be direct beneficiaries of that.

Robert Scott Siefers

Perfect. And then, Mike, just more minutia-oriented one. Obviously, great to see the nearly $3 billion improvement in AOCI. Curious if you have an estimate for what your adjusted or sort of fully loaded common equity Tier 1 ratio is relative to the stated 10.1%.

Michael Baron Maguire

Yes, Scott, I can give that to you. So on a stated basis, we finished the quarter at 10.1%. If you look at our -- the new balance from an OCI perspective, and this would include the AFS, securities as well as the pension, that's about a 2.9% impact. So that would take you down to, call it, I guess, [7 2]. And then the other factors like the thresholds and the RWA inflation we mentioned earlier in the call that we have done more work around an estimate for what the RWA impact might be under Basel and also do a little more work on the thresholds, call those another percent. So that walks you down to low 6s.

Operator

And our next question today comes from Mike Mayo with Wells Fargo Securities.

Michael Lawrence Mayo

Bill, I'm wondering if the optimization, maybe you could call it Truist 2.0, is going fast and deep enough. And I do recognize two items. One, you mentioned headwinds from the past from rates, regulation and retooling; and second, your new efforts, the $750 million savings program, 4% less headcount, 4% less branches ahead. But then I look at core efficiency numbers and I'm like, oh, this is not what we signed up for, right? I mean Slide 8, 9, I think, lists your core efficiency at 59% in 2023. And now you're guiding worse for 2024 and your pre-merger target was 51%. So are you guys doing enough and doing it fast enough to optimize?

William Henry Rogers

Yes, Mike, I think an appropriate challenge, as always. We're doing a lot. So I think I'm really encouraged by the momentum, and you can see it really in the third and fourth quarter. And you see that significantly in particularly the expense declines. And we're committed to what we talked about in September.
I think our $750 million plan, I'm really proud of our teammates. I'm proud of our leadership. They really got the sleeves rolled up and got after it. So the intensity that's in this company right now about being more efficient, I feel is demonstrably better. And being able to apply that over this more simplified organizational structure is where we see the benefits.
So if you think about, as I made in my comments, I mean, sort of that process is complete. So now this intensity, these efforts, these initiatives, we apply that over a much more simplified business model. And the decisions that leaders are making, I think, are just better, stronger decisions, which lead us to a more efficient company long term.

Michael Lawrence Mayo

My follow-up on optimization, I'll give to our -- my colleague, insurance analyst, Elyse Greenspan, Elyse?

Elyse Beth Greenspan

Yes. On the insurance side, there's been press reports on the potential monetization and sales process of that asset. So I was just hoping that you can provide an update to us on just where you stand with that process.

William Henry Rogers

Yes. So I think we've said pretty clearly that the insurance business creates a capital opportunity for us. I mean I outlined that in a lot of specificity. We've said clearly that we're always evaluating alternatives, and we're going to do the best thing for the insurance business and the best thing for Truist going forward. And I don't think -- as it relates to any specific timing and those types of things, I don't think I really should comment beyond that.

Operator

And our next question today comes from Ken Usdin with Jefferies.

Kenneth Michael Usdin

I wanted to ask you to expand a little bit on your outlook for credit. I'm noticing the NPA decline this quarter and you have this unexpected charge-off normalization path. I'm just wondering what you're seeing in terms of what areas of the portfolio you're expecting to see that loss trend higher in the most. And just your general sense of just how the customer set feels in terms of -- that certainly implies a good ramp from here but one that's controllable. So just kind of juxtaposing that NPA decline with your expected ramp and losses.

Clarke R. Starnes

This is Clarke. Thanks for the question. Our '24 NCO guidance, as Mike said, it assumes we're going to continue to see normalization occur both in consumer and wholesale. We've already seen a lot of it in the consumer side. We have a higher mix, as Bill said, of higher-margin consumer finance businesses and less relative mortgage and prime auto. That's a factor on the loss assumption.
But I think the biggest one that you pointed out, we're working really hard to get ahead of any potential areas of stress, think CRE, office. And so our guidance also reflects opportunities to be opportunistic, to work through if we see more challenges in that space as that structural risk unfolds. So we hope to do better. But we're assuming we're going to work hard to make sure that we get ahead of any risk.

Kenneth Michael Usdin

Got it. And just one follow-up. Just wondering, I know you said that you're expecting a hopeful bounce in the investment banking business. Just wondering where you -- where those level of conversations are, and just given your mix of business, where we might expect to see that either come back sooner or have a lag relative to the environment.

William Henry Rogers

Yes, good question. And the good news is we've got a really good balanced investment banking business. So seeing some positive things on a lot of the different buckets. So if you think about equity capital markets, I mean, they're starting to come back. I think we're starting to see some IPO components of that. Our pipeline there is probably the strongest it's been in a long time and pipeline as active book runner. When and if all that comes to bear, I think that's -- we'll just have to be a little bit market dependent.
On the debt side, so the high-yield investment grade, I mean, you've got a lot of maturities sort of running off in '24, so there's sort of a natural refinance opportunity. I think, again, sort of that will be where clients are projecting where they think rates are going to come. So they've got a lot of natural things they have to do, and they'll have to pick that point of demarcation where they want to start the refinancing side.
And then the M&A pipeline is really strong. We spent a lot of time and energy with our verticals and being really relevant. So the size and scope of some of the things that we're doing are proportionately higher, but we've also built this really great pipeline with our transition advisory business with our commercial clients. And we've got more in the pipeline there than we closed all of last year, just as an example. So that's sort of that core bread and butter kind of work.
And then we have things like public finance, which was sort of a nascent business for us. It's -- 12 to 18 months ago and now starting to build up some momentum. And as we see, public finance opportunities are starting to grow. So we have a lot of cylinders that are working, that if they can offset each other and would be a good reason that we would be confident in a pretty nice recovery on the investment banking side. It will be like everything else, a little bit quarter-to-quarter dependent but hopefully a little less volatility for us given that we've got a lot of cylinders running.

Operator

And our next question today comes from Erika Najarian with UBS.

Erika Najarian

The first question is for Bill. Bill, Mike is not saying anything too different about loan growth from the rest of your peers for 2024. That being said, I think, obviously, one of the genesis of the merger of equals is this combined franchise in this footprint that was better than everybody else's.
So I guess my question here is how much of your current adjusted capital state right now is sort of impacting still how you're thinking about growth and going to market? And clearly, there's going to be a lot of questions on use of proceeds if you do sell the rest of Truist Insurance Holdings. But how much different is your approach going to be to market, if at all, if you do monetize TIH?

William Henry Rogers

Yes. Let me answer the first part of that as well. So I think that's a great question. And if you look at sort of the barometer, I was trying to say this earlier on sort of where we go, I think we will reflect our economy and our opportunity. So -- and we'll just have to see sort of how that gets unleashed going forward. And I think the correlation will probably be more directly seen in the C&I side. Because we're, as I mentioned before, not just a capital preservation but -- or optimization, but really more around optimization around return and sort of looking at our core and noncore.
So we've pulled the throttle back on some of the consumer side that we consider to be less capital-efficient. So that's got a little bit of an overhang in terms of where we look at this. I think if we go into 2024, and trying to answer your question, I think the barometer for us ought to be on the parts of consumer where we're investing in C&I overall. And as I said earlier, I think when we see the recovery, we'll see it more disproportionately in our markets and we should reflect that. So I think that's exactly right. But net of your whole question, we're not capital-constrained in terms of the opportunity for growth in the business -- in core business and the places where we're investing.

Erika Najarian

Got it. And just a follow-up question for Mike. One of your peers had framed it this way. So I think the investors found it helpful, but you did mention earlier that you had caution on the betas to the downside. And your first cut is presumed to be May. Considering a lag, could you give us a sense of what your range of assumptions is in terms of downside betas for the first 100 basis points of cuts that's embedded in your guide?

Michael Baron Maguire

Yes, Erika, I'm not -- it's a great question and one we're spending a lot of time on. Look, I mean, I think initially out of the gates, and if these come, call it, 25 at a time and you think about the first hundreds, so the first 4 for us, I think the first half of that is going to be really pressured by the -- by guys still repricing up across the retail business and certain products and segments.
So I guess my use of the word cautionary is thinking about kind of where we're ending up right now on a cumulative beta perspective and just acknowledging that we're going to be lower than that out of the gates for certain. But I don't think -- and if you think about our NII outlook, I think you've got a pretty good sense for how we're thinking about the reprice trend. As we mentioned, we think in the first quarter, in sort of a static rate environment, we're going to be down 3% to 4% on balances and day count and a touch worse on rate paid. And from there, as we start to see the cuts, in our case, we think we flattened out and are pretty stable.

Operator

And our next question comes from Ebrahim Poonawala with Bank of America.

Ebrahim Huseini Poonawala

I guess I just wanted to follow up, maybe Bill and Mike, on the goodwill charge. I'm assuming it's more than a mathematical exercise. And it's hard for me to imagine that higher rates are structurally bad for banking organizations with good deposit base, which is the case for Truist. So to some extent, I guess the read-through is some of the deal synergies tied to the SunTrust, BB&T merger, no longer look as appealing as they did at the time of the deal announcement. One, is -- am I missing something there?
And secondly, Bill, just -- so you've talked about a bunch of strategic actions. Is it fair for us to expect that we -- if we look a year from now, we will see very clearly some of the synergies, be it in terms of market share gains, efficiency tied to the deal where investors can start getting onboard with the franchise?

Michael Baron Maguire

Yes. I'll go on the first one, Ebrahim. Thanks for the question. You sort of said, hey, I assume it's sort of not just -- or maybe you said it is mathematical, and that's right. I mean at the end of the day, we do an annual test for impairment. There are, I mean, thousands and thousands of factors that go into this work. There are customary valuation approaches. You evaluate each reporting unit.
If you think about it, the factors that are significant that we cited in our prepared remarks is that you do have a very -- you've had degradation in operating conditions for the industry. You had a significant decline in, broadly speaking, bank stock valuations, Truist market valuation as of the timing. And we do this test as of a certain day in each year, in our case, it's October 1. And so all those factors are considered and influence the outcome.
But at the end of the day, the estimated fair value is below the carrying value and that's the output. But again, just to reiterate this, absolutely 0 impact to our financial condition or how we think about our opportunity or our strategy or what we're doing.

William Henry Rogers

And it's just done by segment...

Michael Baron Maguire

Yes, that's right. You look at the various reporting segment -- the reporting units for us, which are the consumer and wealth business, at least in '23, corporate and commercial and then insurance.

William Henry Rogers

And then on your second question, hopefully, what I was indicating is that, that process has started. So if you look at the net new account gains, we're seeing the growth in primary accounts, the growth in market share, in investment banking. So those things are actually underway and happening. I think they'll continue to accelerate. They'll continue to build. They'll continue to manifest, as you said, both on the revenue and both on the efficiency side. I think you actually pointed out you'll see both sides of that.

Ebrahim Huseini Poonawala

Got it. And just one quick follow-up. When we look at the commercial real estate multifamily book, there are a bunch of like Southeast markets that are probably seeing a fair amount of supply coming through. Any concerns? I mean what are you seeing in the multifamily CRE today? And any markets where you're particularly focused on in terms of oversupply over the next year or two?

William Henry Rogers

Yes. I'll get Clarke to comment as well, but yes, there are -- part of the great part of our markets is we have a lot of in-migrations. So we've got a lot of building in anticipation of that, so if you think about some of our larger markets, Austin, Orlando, I mean, some of the suspects where you've seen a little bit of that. I'll get Clarke to comment on the quality of the portfolio, so the multifamily large developers that we're in. And long term, the migration positive continues.
So I was looking at some data and I'll just make a comment broadly on that. Within our markets last year, we added a metropolitan in Charlotte. So just think about that in context, So we added about 2.2 net in-migration into our markets. So the overall demographics are good. But I think, in fairness to your question, we probably have a little bit of a shorter-term watch item versus worry item. Maybe Clarke, you can...

Clarke R. Starnes

I agree with you, Bill. Overall, we still think multifamily long term is a very favored asset class, and some of the current challenges in our -- from our perspective relate more to a margin or a current debt service coverage risk issue given rate increases, higher operating costs, and to your point, the new pipeline supply that's coming on. And we just view that very differently than the structural risk we see in office as an example. So we're working with our borrowers to address their specific situations as we look out and how they're going to address this impact.
But again, so what we would expect, more temporary increase in watch list, some nonaccruals, but not -- nowhere near the same loss risk exposure you see in office. And I would remind you that there's a very active secondary placement, sources, a lot of equity sources willing to come in. And the clients that we have, to Bill's point, they want these assets and they're supporting those. So we think it's a manageable risk, even though there's some short-term pressure.

Operator

And our next question today comes from Matt O'Connor with Deutsche Bank.

Matthew Derek O'Connor

Sorry, I missed it, but have you guys talked about what your targeted capital level is? Obviously, you said going from here with no buybacks in the near term. And again, this is impact on the RWAs from the Basel III proposals. But how are you thinking about kind of targeted capital levels over the medium or longer term?

William Henry Rogers

Yes. Matt, so right now, we're at [10 1] in building. And so I think until we get more information, so we sort of understand the dynamics a little bit more and think about our company construct. I think the best thing for us right now is to be in an organic capital building mode. So we haven't set a specific target. But I think 10-plus for the short term to medium term seems a good place for us to be landing right now.

Matthew Derek O'Connor

Okay. And as you think about kind of the 10-plus medium term, is that including AOCI? Because obviously, you're already 10-plus now and did accrete capital fairly quickly this year, given earnings and not much balance and growth.

Michael Baron Maguire

Yes. Matt, I mean, I think we're just -- in the moment we're in, we're looking at spot capital, we're thinking about transition capital measurements if we phase into new roles and we're looking at fully phased in. I think the whole industry is thinking about it that way. So I think when Bill thinks about 10, I mean, I think about it like on a transitional basis, staying at or above 10% is probably what Bill is implying. But I think shorter term is like we're building capital. We're going to continue to do that through organic earnings, and hopefully, we'll have a little more visibility on this rule and give you a little better sense for kind of a medium-term target.

Operator

And our next question comes from Gerard Cassidy with RBC Capital Markets.

Gerard Sean Cassidy

Bill, when we go back to the original merger, I think if I recall correctly, there was a targeted 20% return on tangible common equity and you've just discussed about the capital levels, Basel III being higher than what I presume to be lower numbers back in -- when the deal was announced. Can you share with us, are you still thinking 20% return on tangible common equity is a reasonable goal or you can attain it even with these higher capital levels that you and the industry has to carry?

William Henry Rogers

Yes. I mean, I think, Gerard, when we go back to 2019, that was different world and a different environment both in terms of where we were from a rate standpoint and where we were from a capital standpoint, regulatory standpoint. Now we've got Basel III in front of us.
So I think, in fairness, '20 certainly short and medium term is not necessarily in the windshield. But I think we can continue to perform at a high level in terms of ROTCE. And so all the efficiency opportunities and things we're building, revenue growing, those are things that are continuing to build on that. So I think to think about us being a top performer in that category versus setting a specific target that was constructed in 2019 in a different environment is maybe a different way to think about it.

Gerard Sean Cassidy

Very good. And then coming back, obviously, you guys talked about credit quality. You referenced, Mike, about commercial real estate in your opening remarks and you just talked about multifamily again. And Truist has always been good on its credit. So my question on commercial real estate in the office area, and maybe this is for Clarke, can you kind of draw a line for us from early '22 when there wasn't really any problems before rates started to go higher in downtown office, really, or maybe just emerging?
And incrementally, it's clearly deteriorated. Clarke, can you share with us, is the deterioration accelerating on a sequential basis in the office market? Or have we seen the rapid acceleration of down values, real workouts taken charge-offs? And going forward, yes, you're still going to see higher charge-offs probably, but the actual incremental deterioration is lessening or worsening, can you share with us from that standpoint?

Clarke R. Starnes

Great question we talk a lot about, Gerard. And so I would say as I mentioned, as opposed to multifamily, we view the risk in the CRE sector as more structural, and it still will take some time to play out over the next couple of years. And the way we think about it, everyone with credit in the sector is exposed to the risk. And so the big challenge will be for those that have large concentrations, which we don't. So we feel good about that.
And our strategy has been to try to identify the risk early and work through with those borrowers to address all options. And you see that in how we approached risk rating, accrual status and reserves. So that's kind of where we are right now. We feel good about our efforts. But to your point, we still think about the fact there are very few real trades today. So it's hard to know what real price discovery and whether we've hit the bottom of the cycle or not. I think everyone's trying to recognize that and so you've seen that acceleration.
What I think is still left to come incrementally, as we are still seeing, as leases fully mature, companies, lessees resizing their space needs. And so you can have performing loans today and a good outlook, but you really don't know until you see the leases mature. The other thing I would say is we are seeing some interest, some early interest on long-term investors coming in and that may help. So I would say still more to come.

Operator

We have room for one final question and that comes from Manan Gosalia with Morgan Stanley.

Manan Gosalia

I wanted to come back to the NII guide, and I appreciate all the detail on loan growth and deposit betas. Can you talk about how we should think about the impact of securities repricing and the impact of swaps as we think through that 2024 NII?

Michael Baron Maguire

Yes, no problem. On the securities repricing side, not a huge factor. As you know, our speeds, we mature, call it, $2 billion to $3 billion per quarter, and so probably not as big of an impact on -- in terms of upside for '24. But as you think about the swap book, I think I mentioned in the fourth quarter, we had a little bit of a tailwind to the tune of, call it, $20 million to $25 million relative to Q3.
Our outlook for '24, really interesting enough, the first half, it's a tailwind with some of the payers in our portfolio. But we do have some received fixed swaps that will become effective throughout the course of the year, which will later in the, call it, first half begin to mute the benefit and then by the second half, create a headwind. But for the full year impact, it's actually negligible at least based on the current curve. But that's all factored into our NII outlook.

Manan Gosalia

Got it. And just as we think through the sensitivity to the different rate environment, I think you mentioned some forward starting swaps. Is there any more color, any quantification there? Or anything else we need to think through in terms of the impact on NII from any swings in the forward rate assumptions?

Michael Baron Maguire

Look, I mean, like we disclosed this. I mean if you look at our swap portfolio, we've got about $30 billion of receivers on today. About $10 billion of those will be effective sort of day 1 this year, and by the end of the year, most will be effective. But again, that's incorporated into our outlook.

Operator

And ladies and gentlemen, this concludes the question-and-answer session. I'd like to turn the conference back over to Brad Milsaps for closing remarks.

Bradley Jason Milsaps

Okay. That completes our earnings call. If you have any additional questions, please feel free to reach out to the Investor Relations team. Thank you for your interest in Truist, and we hope you have a great day. Rocco, you may now disconnect the call.

Operator

Thank you, sir. This concludes the conference call. You may now disconnect your lines. Have a wonderful day.